Scarcella v Linknarf Management Services Pty Ltd

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION

2235/02 FRANCESCO SCARCELLA & ORS v LINKNARF MANAGEMENT SERVICES PTY LIMITED (in Liq) & ORS JUDGMENT 1 HIS HONOUR: These proceedings concern a lease and the persistent refusal or failure by the landlords to consent to the assignment of the lease by the tenant. The lease is of shop premises in Bowral ("the premises"). They were let to the defendant for the purpose of conducting a Franklins supermarket. The lessee company was a subsidiary of Franklins Ltd (now Linknarf Ltd) ("Franklins") and is now known as Linknarf Management Services Pty Ltd (in Liq) ("Linknarf"). It is the first defendant. Its liquidator is the second defendant. Franklins decided to abandon its Australian supermarket operations and entered into an agreement to sell a large number of stores (including that conducted in the premises). In New South Wales, 53 stores were purchased by Votraint No 1312 Pty Ltd, whose name was subsequently changed to Interfrank Pty Ltd ("Interfrank"), a subsidiary of the Pick'n'Pay Stores Ltd ("Pick'n'Pay"), a South African public company listed on the Johannesburg Stock Exchange. Pick'n'Pay is said to have 40 per cent of the South African food market. Subsequently, Franklins proposed to sell the business conducted in the premises to Woolworths Ltd ("Woolworths"), the company listed on the Australian Stock Exchange which conducts Woolworths supermarkets in Australia. The assignments to which consent was refused were, first, an assignment to Interfrank and, secondly, an assignment to Woolworths. 2 The lease of the premises ("the lease") was for the term of ten years commencing on 12 August 1994 and terminating on 11 August 2004, with options to renew for two terms of ten years and five years respectively. The provisions of the lease relating to assignment and subletting are as follows: " PART 11 ASSIGNMENT AND SUBLETTING

11.1 LESSEE SHALL NOT SUBLET ETC The Lessee shall not sublet assign transfer or part with the possession of the premises or any part thereof or the Lease thereof or any estate or interest therein to any person … for the operation of any part of the business which the Lessee is permitted to conduct on the premises.

11.2 LESSORS CONSENT IN CERTAIN CIRCUMSTANCES But the Lessee may with the prior approval in writing of the. Lessor such approval shall not be unreasonably withheld assign or transfer the whole of this Lease if: (a) The proposed assignee or transferee is a respectable responsible solvent fit and suitable person capable of carrying on the business in the premises , the onus of proving which shall be upon the Lessee and who shall use the premises only for the purposes of carrying on the business permitted in this Lease. Any proposed assignee or transferee may be required to provide to the Lessor evidence and details of assets, income, liabilities and experience in the business conducted by the Lessee. (b) The Lessee pays to the Lessor all proper costs, charges and expenses incurred by the Lessor of and incidental to any enquiries which may be made by or on behalf of the Lessor as to the respectability responsibility solvency fitness and suitability of any proposed assignee or transferee. (c) The Lessee procures the execution by such assignee or transferee of an assignment or transfer of these presents to which the Lessor is a party in such form as the Lessor or its Solicitors shall approve of and at the cost and expense in all respects of the Lessee. (d) Such assignment or transfer contains a covenant by the assignee or transferee with the Lessor that the assignee or transferee will at all times during the continuance of the term hereby granted duly pay the rent hereby reserved at the times and in the manner herein mentioned and perform and observe all the covenants conditions and agreements of this Lease on the part of the Lessee to be performed and observed including the covenant to use the premises only for the purpose hereinbefore provided.

11.3 TRANSFER INVOLVING CORPORATION Where the proposed assignee or transferee is a corporation the Lessor may as a condition of its consent to such assignment or transfer require that the covenants contained therein by the assignee or transferee be guaranteed by the Directors or Principal Shareholders or such company AND any change in the principal shareholding altering the effective control of the Lessee (if a Company) shall be deemed an assignment of this Lease and will require the consent of the Lessor as aforesaid." 3 The words in the italics (which are mine) did not appear in the original clause 11.2, but were inserted by par 9 of Annexure "C" to the lease. The form of the first italicized passage is an obvious error. As this part of the clause stands, the syntax is a nonsense. If it were read either as "such approval not to be withheld", or "which approval shall not be withheld" the sentence would run correctly and reflect the meaning which in my view was obviously intended by the draftsman and the parties. No one has contended to the contrary. It is impossible to gauge whether one or other of the two correcting formulae set out above (or some other formula) would have been used had the error been recognised before execution. 4 It is a remarkable and important feature of this case that, despite the provisions of clause 11.3, there was no guarantee in the lease of the obligations of the lessee, which, as already noted, was the subsidiary of a listed public company. 5 Section 133B(1) of the Conveyancing Act 1919 ("the CA") provides, so far as material, as follows: "(1) In all leases whether made before or after the commencement of the Conveyancing (Amendment) Act 1930 containing a covenant, condition, or agreement against assigning, underletting, charging, or parting with the possession of demised premises or any part thereof without licence or consent, such covenant, condition, or agreement shall, notwithstanding any express provision to the contrary, be deemed to be subject: (a) to a proviso to the effect that such licence or consent is not to be unreasonably withheld, but this proviso does not preclude the right of the lessor to require payment of a reasonable sum in respect of any legal or other expenses incurred in connection with such licence or consent … " 6 The proposal for sale by Franklins to Interfrank was announced in June 2001 and the consent of the plaintiffs to an assignment of the lease to that company was sought. Despite the fact that it was made clear that it was hoped to conclude the transaction involving the 53 stores by the end of the year, the plaintiffs were tardy in giving any reply. By 3 August 2001, Franklins was complaining that there was unreasonable delay in responding and threatening a claim for damages caused by the delay. The plaintiffs' solicitors replied on 9 August 2001 that one of the plaintiffs was overseas (which would hardly render that person incommunicado in the year 2001) and asked for "evidence of assets and liabilities for each of the company directors, who will be required to guarantee the assignee's obligations under the lease". This was the first mention of any requirement of directors' guarantees. Correspondence continued, but the burden of the response that Interfrank received was the repetition, somewhat like a mantra, as the defendants have submitted, of the proposition that directors' guarantees were required. There was some mention by the plaintiffs that they had a friend who was interested in taking over the store, but the friend never materialised. At one stage there was talk that the plaintiffs would themselves make an offer for the store, but it was never made. On 11 December 2001, there was a suggestion that the landlords would consent to the assignment if the rent was substantially increased, the current term extended for ten years and security by way of bank guarantee given for six months rent. In the end, no consent was given and, some time early in 2002, the sale to Interfrank finally went off as regards the Bowral store. Even before then an alternative sale to Woolworths was mooted. By 25 January 2002, Franklins was seeking the landlords' consent to the assignment of the lease to Woolworths. Again on 31 January 2002, the principal response was that there would be no consent to an assignment to Woolworths unless the directors of Woolworths guaranteed the lease. On that day, Woolworths offered a bank guarantee for the full duration of the lease. On the same day Franklins announced that, if consent were not forthcoming, the store would be closed on 3 February 2002. Again, no consent was forthcoming and the store was closed on 3 February 2002. 7 No later than 5 March 2002, the tenant purported to accept a repudiation of the lease by the landlords said to be constituted by the landlords' unreasonable refusal to consent to the assignment of the lease to Interfrank and to Woolworths and thereby to bring the lease to an end. On 15 April 2002 Linknarf went into liquidation. Franklins has also gone into liquidation. These liquidations were not the result of insolvency, but part of the winding up of the affairs of the Franklins supermarkets business. The liquidator has rejected the landlords' proof of debt for rent since March 2002 on the basis that the lease was determined by the repudiation alleged. Various events have occurred which have led to the tenant procuring a late amendment to plead a defence that the landlords, faced with the tenant's vacation of the premises, elected to treat the lease as at an end. Because of the lateness of the amendment, this issue has not been able to be dealt with at the trial before me and has been ordered to be decided separately from and subsequently to the other issues in the proceedings. 8 The plaintiffs' claim is for arrears of rent for the period from 1 March 2001. The issues on that claim before me may be stated as follows:

(1) Whether the landlords unreasonably withheld consent to the proposed assignments to Interfrank and Woolworths.

(2) Whether the withholding of those consents amounted to a repudiation of the lease by the landlords such as the tenant was entitled to accept and thereby bring the lease to an end. Whether Consent Unreasonably Withheld 9 All parties to these proceedings joined in tendering the issue to be decided in the form of issue (1) set out above. There was equally agreement that s 133B(1) of the CA applied to the covenant in this case. It seems to me that this concession was correct. In these circumstances, clause 11.3 could operate to make it plain that, in appropriate circumstances, a requirement of directors' guarantees would not of itself make the landlords' conduct unreasonable. But it could not exclude the power of the Court to determine reasonableness, nor give absolute entitlement to require the guarantees of directors in all circumstances. In any event, this was the basis on which the case was argued by all. 10 The authority most commonly referred to in relation to the considerations to be taken into account in determining whether consent to an assignment of lease is unreasonably withheld is the judgment of Balcombe LJ in International Drilling Fluids Ltd v Louisville Investments (Uxbridge) Ltd [1986] Ch 513 at 519-521. The propositions enunciated by his Lordship were summarised and approved by Young CJ in Eq in Tamsco Ltd v Franklins Ltd (2001) 10 BPR 19,077 at [49]. Bearing those propositions in mind, I am inclined to the view that the withholding of consent in the case of both Interfrank and Woolworths was unreasonable. Among the factors that I take into account in tending to that view are the insistence upon the personal guarantees of directors of public companies or their subsidiaries, when the original lease was to a subsidiary of a public company without guarantees; the mention of increased rental or increased length of term as a factor in whether consent would be granted; and the reference to a desire by the landlords to occupy the premises personally or let them to people with whom they were acquainted. The long delay in giving a decision concerning Interfrank, when time considerations were of importance, is also an indicator of unreasonableness. However, I do not need to come to and do not come to a final conclusion on the issue of the reasonableness or unreasonableness of the withholding of consent. This is unnecessary because of what appears in paragraphs [17] and [18] below. Termination by Acceptance of Repudiation 11 Contrary to the view once taken, it is now clear that in appropriate circumstances a lease may be brought to an end (as is generally in the case with any other contractual arrangement) by the acceptance by one party of the repudiation by another of the contractual arrangement. It has been so held by the High Court in Shevill v The Builders Licensing Board (1982) 149 CLR 620; The Progressive Mailing House Pty Ltd v Tabali Pty Ltd (1985) 157 CLR 17; and Laurinda Pty Ltd v Capalaba Park Shopping Centre Pty Ltd (1989) 166 CLR 623. If the landlords' conduct were unreasonable and in breach of its obligations under the lease, it may be that the conduct could constitute a repudiation of the lease fit for the tenant to accept and thereby terminate the lease. But the first question is whether the conduct can be taken to be in breach of any obligation of the landlords under the lease. 12 The status of provisions in terms such as "such consent not to be unreasonably withheld" in a tenant's covenant not to assign without consent has been the subject of a large body of authority. The burden of that authority is that, if the provision is truly to be regarded as a proviso to the covenant, then it imposes no obligation upon the landlord which would, for instance, support an action for damages for breach, but leaves the tenant free to proceed with the assignment without consequence. The situation is different if the terminology of the lease is such that the landlord is, upon its true construction, to be taken to have made a covenant or given a promise. In Treloar v Bigge (1874) LR 9 Ex 151, there was a covenant by the lessee not to assign the lease without the consent in writing of the lessor, "such consent not being arbitrarily withheld". The situation was discussed as follows by Kelly CB at 154 - 155: "Now the rule of law, no doubt, is that any words in a deed which impose an obligation upon another amount to a covenant by him; but the words must be so used as to shew an intention that there should be an agreement between covenantor and covenantee to do or not to do a particular thing. I cannot find any such intention here. The words, taken grammatically, do not seem to me to amount to an undertaking by the lessor, but are a part of the same sentence as that containing the lessee's covenant, and qualify its generality. They prevent that covenant operating in any case of arbitrary refusal on the part of the lessor, that is, in any case where, without fair, solid, and substantial cause, and without reason given, the lessor refuses his assent. I have known in my own experience several cases in which actions have been brought for the arbitrary withholding of consent by a landlord. But in all (as in the case of Sheppard v Hong Kong and Shanghai Banking Corporation (1872) 20 WR 459) there was a covenant in express terms, so as to give the lessee a right of action. In the present case, for the reasons I have given, I think there was no such covenant." 13 That case and a long line of successors were considered in this Court by Waddell J in Yared v Spier [1979] 2 NSWLR 291. The covenant in that case was covenant No 16 by the lessee in the relevant schedule of the CA, which was relevantly a covenant not to sublet the demised premises "without the consent in writing of the lessor, but such consent shall not be refused in the case of a proposed respectable and responsible … tenant." After examining closely both the forms of covenant and the Judges' reasons in those cases his Honour said at 297: "The principles upon which the present covenant is to be understood are well established by the decisions mentioned above. In my opinion, it would be extremely artificial to regard the slight differences between the words of the present covenant, and those considered in cases in which it was decided that the lessor was not liable in damages for a refusal of consent, as leading to a different conclusion. It seems to me that it has been taken to be settled law for many years that, in the absence of an express covenant by a lessor not to refuse his consent, provisos of the kind under discussion have been regarded as not exposing him to any liability in damages for such a refusal. There is, I think, no justification for departing from this settled view of the law." 14 In the same year, Treloar v Bigge supra was referred to with approval in the Court of Appeal by Hutley JA in Barina Properties Pty Ltd v Bernard Hastie (Australia) Pty Ltd [1979] 1 NSWLR 480 at 493. As the subject matter of those proceedings was considerably different from the present, there cannot be said to be an authoritative ruling of the Court of Appeal on this matter, but the approval of at least one Judge of Appeal of the principle was made plain. 15 Mr Studdy, of counsel for the tenant, submitted with his usual vigour that this case was different and that on the wording of this lease the landlords should be taken to have made a covenant or given a promise. He points to the fact that the exception is in a clause (11.2) separate from that containing the lessee's principal promise (11.1). He points to the use of the words "shall not be" rather than "not to be". He says that the use of the word "shall" is indicative of a covenant rather than a proviso. He has compared the provisions of the lease in this case with those of the lease in Tamsco supra, which he says the plaintiffs contend contained a covenant by the landlord. He has said that, in any event, the situation should be regarded as changed by the decision of the High Court in cases such as Shevill supra. 16 I have considered carefully everything he has said and the words of Part 11 in the context of the whole lease. These matters are not easy and the area is a technical one, but I cannot see any distinction of reality between these provisions and the provisions considered in Treloar v Bigge supra, Yared v Spier supra and other proviso cases. There may be a division of Part 11 into sub clauses 11.1, 11.2 and 11.3, but to me the whole of Part 11 has the characterisation of a covenant by the lessee not to assign with provisos or exceptions built into it. The words "shall not be" do not have any different significance in this context from the words "not to be". And the possible significance of the words "shall not be" in the context is muddied by the unsatisfactory syntax of the clause after the insertion of the italicized words. As I have already commented, the error created by the insertion could be equally easily corrected by reading the clause as "which consent shall not be" or "such consent not to be". The provisions in Tamsco are significantly different (not that I am construing the lease in Tamsco), in that the form of the separate clause relating to the withholding of consent in that case can be more readily regarded as constituting a promise by the landlord. Significant as is the change in the law effected by Shevill, in my view it does not detract from principles as to whether or not obligations are imposed by particular forms of covenants in leases, which have been developed over centuries rather than decades. This is particularly so, since changes in this regard are likely to unsettle settled relations in respect of rights of property. 17 In my view, the provision for consent not to be withheld in this lease is of the nature of a proviso rather than of a covenant or promise within the meaning of the principles set out in the authorities discussed above. That being so, the unreasonable withholding of consent would not constitute a breach of covenant or obligation on the landlords' part. The result of such conduct would be that the tenant would be left free to assign without consequence. Equally, under the modern law, the tenant could seek a declaration from the Court that the consent was being unreasonably withheld: Tamsco supra; Cathedral Place Pty Ltd v Hyatt of Australia Ltd [2003] VSC 385. But even if the withholding were unreasonable, the tenant could not sue for damages for breach of contract. Equally, in my view, as there would be no breach of obligation by the conduct, the conduct could not constitute a repudiation of the lease by the landlords which the tenant could, by accepting, terminate the lease. In my view, if the conduct could not be regarded as a breach of obligation, it could not be regarded as conduct evincing an intention not to be bound by the lease. There was therefore no conduct amounting to a repudiation of the lease available to be accepted by the tenant and the lease cannot be taken to have been terminated in that way. The Cross Claim 18 Both Linknarf and Franklins cross claim against the plaintiffs for damages for negligence. This cross claim arises out of the same subject matter as the claim. It is said that the plaintiffs in the circumstances owed each of them a duty of care which was breached by the plaintiffs' unreasonably withholding consent to the assignment of the lease. The damages sought are the loss of the bargains with Pick'n'Pay and then Woolworths in relation to the assignment of the lease. The law in this area has been quite unclear since the decision of the High Court in Perre v Apand Pty Ltd (1999) 198 CLR 180: see also Sullivan v Moody (2001) 207 CLR 562; Graham Barclay Oysters Pty Ltd v Ryan (2002) 211 CLR 540; Woolcock Street Investments Pty Ltd v CDG Pty Ltd [2004] HCA 16; and see the decision of the Court of Appeal in State of NSW v Godfrey [2004] NSWCA 113. It does remain clear that the manner of performance of obligations in a contract between A and B may in circumstances where a duty of care to C arises give rise to liability in negligence to C. It is difficult in the present state of the law to define the criteria by reference to which such a duty of care might arise. Whatever they may be, I cannot see that it is established in this case that such a duty of care by the plaintiffs arose in favour of either Linknarf or Franklins. I have already found that the actions of or lack of action by the plaintiffs did not amount to an actionable breach of obligation by them. I find it difficult to see in the circumstances how a duty of care arose towards Linknarf. I find it equally difficult to see how a duty of care arose to its parent company. Quite apart from any other considerations, it seems to me that a duty of care could not arise when the situation could be controlled by Linknarf by its either proceeding with an assignment without consent or seeking a declaration that the failure to consent was an unreasonable withholding. Equally in the case of Franklins, it could have caused Linknarf to proceed in either of those ways. I find that no duty of care arose. Not only do these considerations operate to preclude the existence of a duty of care, but they operate to destroy any causal connexion between the conduct complained of and the loss, and this whether or not there is a duty of care. This is because it was open to the cross claimants to proceed in the fashion which I have set out above. Any suggestion that there was not time to seek declaratory relief could not realistically be made in the face of the facilities for swift relief provided in the Duty and Expedition Lists of this Division of the Court. The cross claimants' suggestion that they were precluded from acting in this way by the delicacy of the negotiations cannot be regarded in the circumstances as a realistic excuse for not acting. For the foregoing reasons, there must be judgment for the cross defendants upon the cross claim. 19 I shall appoint a time for the parties to bring in short minutes to give effect to the decisions embodied in these reasons. At that time, any question of costs can be argued and directions may be sought as to the conduct of the balance of these proceedings not disposed of by this judgment.

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